Turning transformation into reality: a CFO's perspective

Practical insights to help leaders make change happen in their organizations

The fourth post in this series looked at how to keep a transformation on track to get it done. I suggested that to be effective, a transformation needs continuous drive and a laser focus on outcomes.

So far, in this series, we’ve discussed the importance of detailing your transformation plans, resourcing the delivery teams, obtaining stakeholder buy-in and building a robust governance mechanism.

How do you now make sure that the financial benefits are achieved? To answer this question I asked my BCG colleague and former CFO, Mark Hawken, about his experience delivering decisive change under challenging circumstances.

Remember that activity is cost

Put simply, financial results are just an output measure of everything that happens within an enterprise. Activity is cost. So, in order for any transformation to be financially successful, an enterprise needs to truly understand what it does that drives cost. Once this link is understood, there are only two ways to reduce cost: stop an activity altogether or find a way to do it more efficiently. This sounds simple but is often difficult to achieve in large, complex organisations.

I’ve seen many budget cuts masquerading as transformations. But cutting costs without reengineering underlying activities doesn’t work. Lose 20 people and their work may end up being outsourced at greater expense. You’re back to “whack a mole”: the cost will just reappear somewhere else. That said, challenging divisions, through the budget process, to consider what they need to stop doing in order to save money can be a good way to kickstart critical appraisal of which activities really add value.

Ensure operations and finance plan together

Similarly, spend on “transformational” IT projects will fail to deliver savings if the activities they support are not properly reviewed. An end-to-end view is critical, particularly for the finance function (I admit a certain bias here). This is because every change activity has consequences for financial tracking and reporting. Simplification at the front end does not always make things easier for finance: it could create more work in reconciliation and reporting, and this needs to be captured in the business case.

Measured by financial impact, the best transformation programs therefore involve participants from both operations and finance at the earliest stage. This ensures that the links between proposed operational changes and expected financial outcomes are real and measurable.

Prioritize scarce resources and set clear financial objectives

The transformation process needs to be properly resourced, in terms of both people and investment. There will always be pinch points where projects compete for the same resources: often, these are in IT. And few businesses have the investment cash to achieve everything on the transformation wish list in a tight timescale. Prioritization is therefore essential. What’s the best way to go about it?

First, the CEO (as sponsor) and CFO (as guardian of the balance sheet) should set the financial priorities. Are in-year cash savings the priority? Are near-term savings prioritised over savings in outer years? Is cash/payback the primary focus, or EBITDA uplift? What is the overall investment envelope available over the plan period, by year? (My preferred measurement mechanism is always cash-based – cash in the bank does not lie and is ultimately the lifeblood of companies).

Then, if there are no internal resource constraints, projects can be ranked in relation to financial priorities, for example in value delivered per pound invested, or earliest/highest value delivery, or highest run rate EBITDA impact by year three (typical for a PE firm looking at exit horizons).

If there are internal resource constraints, we need to overlay the supply/demand for them onto the analysis and also look at the value delivered per unit of scarce resource. For example, in a recent client transformation program, certain IT skills were scarce across multiple projects. Some of this could be dealt with by sourcing generic IT skills from the contractor market, but some more specific skills could not. We therefore ranked the projects on the basis of value delivered (in this case profit uplift in year 1) per unit of IT time consumed and were able to schedule the projects to maximize the planned benefits against this resource constraint.

Don’t rest until the cash is in the bank

And finally, a large number of transformations today involve simplifying/digitising processes, reducing workloads and freeing up capacity. It is always tempting to claim that this increased capacity will deliver cost savings in the future, because new hires will not be needed. But this is hard to measure and rarely realized. The uncomfortable truth is that sometimes savings need to be achieved by losing colleagues.

Wherever savings come from –consolidating suppliers, rationalising product ranges, reducing complexity or reducing the workforce – companies need to follow through to the finish line if they are serious about making real savings. In doing so, companies must, of course, be thoughtful in dealing with colleagues, suppliers and customers. Colleagues need to be offered retraining, (real) re-deployment and voluntary exit processes (you’d be amazed how successful these are). Suppliers can be offered alternative procurement opportunities and customers offered different products. 

But always test financial success by asking: have I put cash in the bank today?